It's All Politics

3:23 pm

Thu December 27, 2012

Federal Government Prepares For Uncertain Landing After 'Fiscal Cliff'

With negotiations to avoid the "fiscal cliff" uncertain at best, the Obama administration is trying to tamp down anxiety in the federal workforce.

The administration's message to various federal agencies is that there will be little immediate effect on public employees from the budget cuts scheduled to take effect next week if a deal is not reached. Treasury Department employees, for instance, were told not to expect "day to day operations to change dramatically on or immediately after January 2."

For workers, of course, that's good news.

"What they've been telling the employees is that the agencies should use January as a transition period," says Colleen Kelley, president of the NTEU, which represents some 150,000 federal employees, including those at Treasury, "and that there wouldn't really be any direct effect on them for the month of January."

That's because while most federal agencies will see their budgets cut by more than 8 percent if the automatic spending cuts take effect, they'll have the rest of the fiscal year to absorb the reduction. And lawmakers and the president might still reach a deal to avoid the cuts.

But if they can't, Kelley says, it will mean furloughs or layoffs for some government workers.

"If it happens, most likely agencies are going to have to be looking at furloughs," she says. "That will be the only way that they could meet those kinds of budget cuts if that happens."

Taxes are set to go up Jan. 1 if there's no action between now and then. But employers have been given no guidance as to how much to take out of their workers' paychecks.

"Treasury has not issued any withholding tables because they have been waiting for Congress to do something," says John Roth, a federal tax analyst at CCH, which provides tax and accounting information. "So a lot of the payroll companies are kind of just sort of like, 'Well, what do we do?' "

Roth says it's pretty much impossible to do any tax planning with all the uncertainty.

And it's not just income taxes that will go up. The payroll tax cut is set to expire, the child tax credit will be cut in half, capital gains and dividends will be taxed at higher rates and, if nothing is done, the alternative minimum tax, or AMT, will apply to lower income levels.

To use a technical term, it will be a big mess.

But budget watcher Stan Collender says that may be what it takes to spur Congress to act. "I'm pretty sure that once we get over the fiscal cliff, once John Boehner gets re-elected as speaker, the ability of cutting a deal will get a little bit greater — particularly as the peasants start to storm the castle with pitchforks and complain about the lack of certainty in the tax code and with spending," he says. "I don't think it's going to be a big deal, but I do think they'll get something in January and then we're going to refight everything out in February and March on the debt ceiling."

In other words, Collender believes we can expect the back and forth between the president and Congress to last into the spring.

As negotiations continue up to the last possible second, the Obama administration is preparing for what's to come if we do go over that cliff. It has sent guidance to federal agencies that could face big cuts in 2013, but there's still a lot of unanswered questions about how to plan for automatic tax hikes, as NPR's Brian Naylor reports.

BRIAN NAYLOR, BYLINE: The word went out from the White House last week. In memos to various federal agencies, public employees were assured by their bosses there would be little immediate impact on them if the government fell off the fiscal cliff and spending is cut. Treasury Department employees, for instance, were told not to expect, quote, "day to day operations to change dramatically on or immediately after January 2nd." For workers, of course, that's good news.

Colleen Kelley is president of the NTEU, which represents some 150,000 federal employees, including those at Treasury.

COLLEEN KELLEY: What they've been telling the employees is that the agencies should use January as a transition period and that there wouldn't really be any direct effect on them for the month of January.

NAYLOR: That's because while most federal agencies will see their budgets cut by more than 8 percent if the automatic spending cuts take effect, they'll have the rest of the fiscal year to absorb the reduction. And lawmakers and the president might still reach a deal to avoid the cuts. But if they can't, Kelley says, it will mean furloughs or layoffs for some government workers.

KELLEY: If it happens, most likely, agencies are going to have to be looking at furloughs. That will be the only way that they could meet those kinds of budget cuts if that happens.

NAYLOR: For now, federal agencies are taking a wait-and-see attitude, yet that's posing other problems. Taxes are set to go up January 1st if there's no action between now and then. But employers have been given no guidance as to how much to take out of their workers' paychecks. John Roth is a federal tax analyst at CCH, which provides tax and accounting information.

JOHN ROTH: Treasury had not issued any withholding tables because they have been waiting for Congress to do something, so a lot of the payroll companies are kind of just sort of like, well, what do we do?

NAYLOR: Roth says it's pretty much impossible to do any tax planning with all the uncertainty. And it's not just income taxes that will go up. The payroll tax cut is set to expire, the child tax credit will be cut in half, capital gains and dividends will be taxed at higher rates and, if nothing is done, the AMT, the alternative minimum tax, will apply to lower income levels. To use a technical term, it will be a big mess.

But budget watcher Stan Collender says that may be what it takes to spur Congress to act.

STAN COLLENDER: I'm pretty sure that once we get over the fiscal cliff, once John Boehner gets re-elected as speaker, the ability of cutting a deal will get a little bit greater, particularly as the peasants start to storm the castle with pitchforks and complain about the lack of certainty in the tax code and with spending. I don't think it's going to be a big deal, but I do think they'll get something in January and then we're going to re-fight everything out in February and March on the debt ceiling.

NAYLOR: In other words, Collender believes we can expect the back and forth between the president and Congress to last into the spring. So, happy New Year. Brian Naylor, NPR News, Washington. Transcript provided by NPR, Copyright NPR.